AAII Sentiment Survey: Most Pessimism Since February 2016

Pessimism among individual investors jumped to its highest level in more than year in the latest AAII Sentiment Survey. At the same time, the percentages of individual investors describing their six-month outlooks as “bullish” or “neutral” fell.

Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 7.9 percentage points to 30.0%. Optimism was last lower on November 2, 2016 (23.6%). The drop keeps bullish sentiment below its historical average of 38.5% for the seventh time in eight weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 3.0 percentage points to 23.5%. This is a three-month low. It is also the third consecutive week with neutral sentiment below its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 10.9 percentage points to 46.5%. Pessimism was last higher on February 10, 2016 (48.7%). The increase keeps bearish sentiment above its historical average of 30.5% for a fourth consecutive week and the seventh time in eight weeks.

Bearish sentiment is above its typical range. Historically, the S&P 500’s performance following unusually high levels of pessimism has been mixed, with a median six-month gain of 5.8% versus 4.9% for all six month periods between July 1987 and November 2016. The likelihood of the S&P 500 index being higher in six months is lower, however, 67.8% versus 73.1%. Bullish and neutral sentiment both remain within their typical historical ranges even with this week’s declines.

Pessimism has largely been above average since mid-January, as noted above. This week’s big jump has occurred as both large-cap and small-cap stocks have pulled back from their recent highs. Many individual investors are concerned about stocks having rallied too far, too fast or high valuations. At the same time, the potential impact that President Trump could have on the domestic and global economy continues to cause uncertainty or concern among some investors, while encouraging others. It’s also possible that the recent increase in expectations for a rate hike at next week’s Federal Reserve meeting could have dampened some individual investors’ moods, even though many have been frustrated by the ongoing low interest rate environment.

This week’s special question asked AAII members to share their thoughts about the current duration of the bull market, which is marking its eighth birthday today. More than half of all respondents (57%) believe the market is at risk of falling. Several of these respondents are anticipating a correction (a drop of at least 10%). Others cited politics or valuations. Conversely, nearly 18% of respondents think the bull can continue to run. Several of these respondents cited optimism about the Trump administration as the reason, while others think stock prices will continue to rise as long as earnings do.

Here is a sampling of the responses:

“It’s way overdue for a correction.”

“It will continue if Trump’s tax policies are followed.”

“Will continue upward after a near-term 10% pullback.”

“It is getting very long in the tooth.”

“Pretty long in the tooth. Valuations (forward earnings) are becoming too rich.”

This week’s AAII Sentiment Survey results:

Bullish: 30.0%, down 7.9 percentage points

Neutral: 23.5%, down 3.0 percentage points

Bearish: 46.5%, up 10.9 percentage points

Historical averages:

Bullish: 38.5%

Neutral: 31.0%

Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at: http://www.aaii.com/sentimentsurvey.